Gold was one of the best performing assets in 2024 and hit record highs several times amid worsening economic conditions and continued debt issuance. UBS said gold's gains are expected to continue as the prospect of rate cuts and geopolitical tensions increase.
UBS analysts said in a report: "Gold prices have risen by more than 25% so far this year. In addition to expectations of low returns, macro and geopolitical uncertainties have provided further support for gold prices. In addition, the central bank's continued diversification of foreign exchange reserves is also beneficial to gold prices."
They said geopolitical tensions are likely to “continue beyond the fourth quarter while the next U.S. administration (and its policies) is uncertain,” highlighting that “both Ukraine and Gaza have significant unresolved conflicts with no clear catalyst for their end.” The bank wrote:
"We expect gold to continue to be the safe haven of choice from geopolitical and interest rate risks. Gold has historically outperformed equities during periods of heightened volatility, and this has been demonstrated again in recent months despite less dovish market expectations for the pace of Fed rate cuts."
Analysts said that in their view "gold could go further up" and set a gold price target of $2,700 an ounce by mid-2025.
They said, "In addition to short-term risk drivers, we expect demand for gold ETFs to accelerate in the coming months. According to official gold ETF data released by the World Gold Council, physically-backed gold ETFs continued to see inflows in August, and it was the fourth consecutive month of inflows. Total holdings have rebounded to nearly 3,182 tons, the highest level since the beginning of the year, narrowing the outflow so far this year to 44 tons."
"We recommend that a diversified dollar-denominated portfolio should allocate 5% of its funds to gold as a broad portfolio safe-haven," the analysts said.
They noted that while gold has performed as a store of value, silver has lagged behind gold.
They stressed: "The closely watched gold-silver ratio, which reflects the relative value of the two, has rebounded to over 85 times after hitting a low of about 73 times in late May. Weakness in base metals and broader commodities could weigh on silver."
They added, "Nevertheless, we maintain our view that silver will benefit from a rising gold price environment, which is consistent with an accommodative Fed policy. We expect the silver market to continue to be in a state of supply and demand imbalance over the next few years, which means that inventories will continue to decline and help to fundamentally support prices and provide support for investor interest."
Analysts said, "We expect silver to outperform gold over the next 12 months, with the gold-silver ratio likely to test its long-term average of just below 70 times."
As for platinum group metals, they noted: “The prospect of further interest rate cuts by the Federal Reserve has boosted platinum group metal (PGM) prices in the near term.” They then noted: “PGM prices lack clear directional trading this year.”
They said, “While market surplus considerations are likely to continue to weigh on palladium prices, the clear deficit in the platinum market suggests prices could move higher. The production cost side is also bullish for prices, particularly for platinum, with the PGM production basket trading more than 20% above the South African miners’ cost curve. Headwinds come from a soft automotive market and weak demand for industrial applications.”
